The effects of cross-border cooperation on disclosure enforcement,earnings attributes,and transparency

This study tests for changes in U.S.-listed foreign firms’ financial reporting properties and transparency when their home market regulators enter an arrangement that facilitates enforcement cooperation with the Securities and Exchange Commission. This arrangement—the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU)—has explicit disclosure-related provisions. I show that the MMoU is associated with improvements across various measures of accounting properties and transparency. Collectively, the findings help resolve enduring questions about why the earnings quality of U.S.-listed foreign firms diverged from that of U.S. firms during pre-MMoU periods.     

Voluntary disclosures of intangibles information by U.S.-listed Asian companies

This paper provides evidence on the voluntary disclosure of intangibles information for U.S.-listed Asian companies. The paper examines the following issues: (1) the effect of firm size, ownership concentration, proportion of foreign revenue, and leverage on voluntary disclosures of intangibles information by U.S.-listed Asian companies; and (2) the use of international standards, and the effect of domestic and global culture on those disclosures. Results indicate that larger firms, firms with greater ownership dispersion, and firms with lower leverage provide more voluntary disclosure of intangibles information. The paper also documents that companies from countries that are more individualistic provide more voluntary disclosure of intangibles information than companies from countries that are collectivist. Therefore, it appears that domestic culture does affect the voluntary disclosure of intangibles information in the U.S. This paper uses the index developed for Portuguese companies by Oliveira, Rodrigues, and Craig (2006), to measure voluntary disclosures of intangibles information thereby providing external validity to their instrument.     

The value of the PCAOB’s international audit oversight on U.S. listed foreign companies: Evidence from an initial enforcement breakdown

Using, as a natural experiment, the Public Company Accounting Oversight Board’s May 18, 2010, release stating that its oversight of certain foreign auditors had been denied, we examine investors’ early valuation of the PCAOB’s international audit oversight on U.S.-listed foreign companies. Comparing reactions for the release-exposed U.S.-listed foreign companies to reactions for other U.S.-listed foreign companies, we find a significant decline in the share values of the release-exposed companies. The decline is driven by companies with auditors from China; the on-list companies from the 19 on-list European jurisdictions do not experience significantly negative stock market reactions. Using difference-in-differences analyses of earnings response coefficients, abnormal stock returns and trading volumes surrounding earnings announcements, and analyst forecast dispersions, we find a decline in perceived financial reporting quality for the release-exposed foreign listings from China but not for the release-exposed companies from the 19 European jurisdictions—a finding in line with the results of the stock market reaction analyses. These results are consistent with the view that the PCAOB’s international inspection would create a net value for U.S.-listed companies from China.     

Asset Liquidity and Stock Liquidity: International Evidence

This study examines the relationship between asset liquidity and stock liquidity across 47 countries. In support of the valuation uncertainty hypothesis, we find that firms with greater asset liquidity on average have higher stock liquidity. More importantly, our study shows that asset liquidity plays a more significant role in resolving valuation uncertainty in countries with poor information environment. For example, we find that the asset–stock liquidity relationship is stronger in countries with poor accounting standards. We further find evidence that after the adoption of IFRS, the improved accounting information environment results in a weaker asset–stock liquidity relation, but only in countries with a strong legal regime. Finally, our study shows that the positive asset–stock liquidity relationship may be attributed to transparency and/or liquidity reasons.     

Cross-listing effect on information environment of foreign firms: ADR type and country characteristics

We examine sources of improvement in the information environment of foreign firms that cross-listed in the United States as American Depositary Receipts (ADRs) between 1995 and 2005. We analyze changes in the number and dispersion of analyst recommendations on foreign firms following their cross-listing. We find increases in analyst coverage intensity across all four types of ADR programs, especially among firms that were listed on organized exchanges (the listing effect), and those that adopted capital raising ADR programs (the financing effect). Our results suggest that the listing effect is more persistent than the financing effect. On the other hand, reductions in recommendation dispersion are observed mainly for firms that choose non-capital raising ADRs and those from emerging markets. Overall, improvements in information environment are more profound among foreign firms originating from countries with greater information asymmetry, namely, countries with weaker legal tradition and rule of law, and countries that are less familiar to U.S. investors.     

Can foreign firms bond themselves effectively by renting U.S. securities laws?

The study tests the functional convergence hypothesis, which states that foreign firms can leapfrog their countries’ weak legal institutions by listing equities in New York and agreeing to follow U.S. securities law. Evidence shows that the SEC and minority shareholders have not effectively enforced the law against cross-listed foreign firms. Detailed evidence from Mexico further shows that while some insiders exploited this weak legal enforcement with impunity, others that issued a cross-listing and passed through an economic downturn with a clean reputation went on to receive privileged long-term access to outside finance. As compared with legal bonding, reputational bonding better explains the success of cross-listings.     

The effects of operating cash flow disclosure on earnings comparability,analysts' forecasts,and firms’ investment decisions during the Pre-IFRS era

We examine the effects of the availability of operating cash flow (OCF) information disclosed by firms operating in 15 international countries during the pre-IFRS era on: (1) the comparability of these firms' disaggregated earnings to those of U.S. firms for equity valuation purposes, (2) the properties of analysts' earnings forecasts, and (3) the efficiency of firms' investment decisions. We find that the comparability of disaggregated earnings improves after company-disclosed OCF information is available. We also find decreases in analysts' forecast errors and dispersion and a decrease in firms’ tendency to over- or under-invest when they are predisposed to do so.     

Does the investment horizon of institutional investors matter for stock liquidity?

This paper examines the role of the investment horizon of institutional investors on stock liquidity of firms. We show that an increase in long-term institutional ownership is negatively associated with firm liquidity, while an increase in short-term ownership is positively related to a firm's stock liquidity. We identify the ownership-liquidity relationship by examining two major channels: the trading activity channel and the informational friction channel. Long-term investors reduce stock liquidity through low frequency trading and access to value-enhancing and private information, which induces adverse selection bias. In contrast, short-term investors improve liquidity through trading activity and competition with other investors, which lowers transaction costs. Our findings further suggest that the effects of an increase in long-term (short-term) institutional investors on liquidity weaken (strengthen) when a firm has more publicly available information. Finally, we show that the positive impact of an increase in long-term ownership on valuation is more pronounced for firms with higher liquidity and the valuation effect is persistent.     

Does bonding really bond? Liability of foreignness and cross-listing of Chinese firms on international stock exchanges

This study examines the relationship between cross-listing and firm valuation in the context of Chinese firms cross-listed on major international exchanges, such as the NASDAQ, New York Stock Exchange (NYSE), Hong Kong Main Board, Hong Kong Growth Enterprise Market (GEM), Singapore Stock Exchange, and London Alternative Investment Market (LAIM). Through the lenses of bonding theory and liability of foreignness-based multinational enterprise theories, two sets of alternative hypotheses are developed and tested using panel data over a period of twelve years during 2001–2012. Contrary to the bonding theory, the results reveal that the firms listed in Mainland China recorded better valuation than the firms cross-listed on the international stock exchanges. The more sophisticated corporate governance mechanisms applied in international stock exchanges do not always entail better firm valuation. Institutional distance, cultural distance and the distance in economic freedom between China and the cross-listing location countries interact with governance variables negatively affecting performance of cross-listed firms. The direct negative impact of the three distance variables on the firm valuation is also statistically significant. The outcome of Chinese firms’ cross-listing behaviours appears to contradict the general bonding theory.     

Does the method of entry matter? Evidence from Indian ADRs and GDRs

This paper documents changes in volatility, returns, liquidity and valuation on the local market following different ADR issues, viz., Level I, II, III, Rule 144A and Regulation S offerings, by the Indian firms in the global market. The sample consists of 84 ADR and GDR issues made by the Indian firms during 1990–2001. The Rule 144A and Reg S issues experience a significant decline in volatility on the home (Indian) market and these effects are mainly observed during the first sub-period, i.e. 1990–1997. In addition, Level III ADRS, which are exchange listed and capital raising issues, experience a significant increase in liquidity on the home market and these occur in the second sub-period, i.e. 1998–2001. Though ADRs in general experience an increase in valuation (as measured by the q ratios) after the U.S. issue, there is no strong evidence to suggest that the magnitude of increase depends on the method of entry.     

Effect of auditing: Evidence from variability of stock returns and trading volume

Although the benefits of auditing are uncontroversial in developed markets,there is scant evidence about its effect in emerging economies.Auditing derives its value by increasing the credibility of financial statements,which in turn increases investors’reliance on them in developed markets.Financial statement information is common to all investors and therefore increased reliance on it should reduce divergence in investors’assessment of firm value.We examine the effect of interim auditing on inter-investor divergence with a large sample of listed Chinese firms and find that it decreases more for firms whose reports are audited compared to non-audited firms.This finding suggests that investors rely more on audited financial information.Results of this study are robust to variations in event window length and specification of empirical measures.     

Trade credit and the joint effects of supplier and customer financial characteristics

We examine how access to bank credit affects trade credit in the supplier–customer relationships of U.S. public firms. For identification, we use exogenous liquidity shocks to supplier firms in the form of staggered changes to interstate bank branching laws. Using a variety of tests, we show that supplier firms with greater access to banking liquidity offer more trade credit to their customers. We also show that when bank branching restrictions are relaxed in the supplier’s state, the supplier–customer relationship is more likely to survive.     

IAS Versus U.S. GAAP: Information Asymmetry–Based Evidence from Germany's New Market

Motivated by the debate about globally uniform accounting standards, this study investigates whether firms using U.S. generally accepted accounting principles (GAAP) vis‐à‐vis international accounting standards (IAS) exhibit differences in several proxies for information asymmetry. It exploits a unique setting in which the two sets of standards are put on a level playing field. Firms trading in Germany's New Market must choose between IAS and U.S. GAAP for financial reporting, but face the same regulatory environment otherwise. Thus, institutional factors such as listing requirements, market microstructure, and standards enforcement are held constant. In this setting, differences in the bid‐ask spread and share turnover between IAS and U.S. GAAP firms are statistically insignificant and economically small. Subsequent analyses of analysts' forecast dispersion, initial public offering underpricing, and firms' standard choices corroborate these findings. Thus, at least for New Market firms, the choice between IAS and U.S. GAAP appears to be of little consequence for information asymmetry and market liquidity. These findings do not support widespread claims that U.S. GAAP produce financial statements of higher informational quality than IAS.     

The reputation of underwriters: A test of the bonding hypothesis

In the spirit of the Bonding Hypothesis proposed by Stulz (1999) and Coffee (1999, 2002), I find that foreign firms that cross-list in the U.S. and undertake IPOs are more likely to employ reputable underwriters if the firms come from countries with poor shareholder protection. The additional monitoring provided by reputable underwriters may help overcome the skepticism of U.S. investors, and partially explains the higher valuation these firms obtain after the offering. There is, however, a price to pay for this bonding benefit. I find that issuers from countries with weaker shareholder protection tend to be more underpriced if they are sponsored by prestigious underwriters.     

Shaping Liquidity: On the Causal Effects of Voluntary Disclosure

Can managers influence the liquidity of their firms’ shares? We use plausibly exogenous variation in the supply of public information to show that firms actively shape their information environments by voluntarily disclosing more information than regulations mandate and that such efforts improve liquidity. Firms respond to an exogenous loss of public information by providing more timely and informative earnings guidance. Responses appear motivated by a desire to reduce information asymmetries between retail and institutional investors. Liquidity improves as a result and in turn increases firm value. This suggests that managers can causally influence their cost of capital via voluntary disclosure.     

Tariff uncertainty and firm innovation: Evidence from the U.S.–China Permanent Normal Trade Relation

We examine the effect of the tariff uncertainty associated with Chinese imports on U.S. firm innovation. Our test exploits the U.S. conferral of Permanent Normal Trade Relations (PNTR) on China—a policy that reduces the uncertainty of future tariff increases for Chinese goods. We find a significant increase in the number of patents and patent citations for U.S. firms affected by PNTR relative to other firms. This result is stronger for firms with more irreversible investments and for firms that experience a greater increase in Chinese goods following PNTR. Overall, our evidence is consistent with the view that lowering the tariff uncertainty of Chinese imports boosts the attractiveness for U.S. firms to make long-term irreversible investment (such as technological innovation) and thus induces U.S. firms to innovate more.     

A Breakdown of the Valuation Effects of International Cross‐listing*

It is well known that cross‐listing domestic stocks in foreign exchanges has significant valuation effects on the listed company's shares. Using a sample of firms with dual shares, we explore the differential effects of cross‐listing on prices and we are able to separate the different sources of the benefits of cross‐listing. These sources include market segmentation, liquidity, and the bonding of controlling shareholders to lower expropriation of firm resources. Our results show that even though the market segmentation and bonding effects are both statistically significant, the economic significance of segmentation is more than double that of bonding. Furthermore, we document an economically and statistically significant increase in the liquidity of both share classes after the listing. Overall, our results explain why less and less firms are willing to list in the USA: Sarbanes Oxley has increased the cost of adopting better governance while its benefits are not substantial; and market segmentation has decreased significantly in the last years.     

The economic consequences of increased disclosure: Evidence from international cross-listings

We examine market behavior around earnings announcements to understand the consequences of the increased disclosure that non-U.S. firms face when listing shares in the U.S. We find that absolute return and volume reactions to earnings announcements typically increase significantly once a company cross-lists in the U.S. Furthermore, these increases are greatest for firms from developed countries and for firms that pursue over-the-counter listings or private placements, which do not have stringent disclosure requirements. Additional tests support the hypothesis that it is changes in the individual firm's disclosure environment, rather than changes in its market liquidity, ownership, or trading venue, that explain our findings.     

An empirical study of multiple direct international listings

In this study, we examine the multiple direct foreign-listing by analyzing characteristics of listing firms as well as hosting and home countries. Our results show that listing premium increases over time, but this premium diminishes as the firm lists in additional foreign markets. Multiple listing is closely related to the firm's ability to list, but does not translate into better future or higher returns. Additionally, we find no evidence to support the bonding hypothesis. We conclude that firms list in additional foreign countries to take advantage of higher valuation to raise capital more cheaply, rather than to benefit from a better legal environment.     

Liquidity: Urban versus rural firms

Our paper examines the impact of geographic location on liquidity for U.S. rural- and urban-based companies. Even after adjusting for size and other factors, rural firms trade much less, are covered by fewer analysts, and are owned by fewer institutions than urban firms. Trading costs are higher for rural Nasdaq firms, and volume that can be attributed to marketwide factors is lower for rural stocks. The findings add to our understanding of the way that access to information and familiarity affect liquidity.